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Forming an LLC alone will not change your tax situation. The default rule the IRS imposes on a single-owner LLC is that it is treated as a "disregarded entity," meaning that for tax purposes, it's as if the LLC doesn't exist. You still report your income/expenses on 1040 Schedule C. You can elect to change the default tax treatment of your LLC and treat it as an S corporation or C corporation. An S corporation can have slightly different treatment for your income. You can separate your earnings into a salary and regular distributions. Your salary would be taxed at the traditional W2 rates, meaning all of the traditional payroll tax rates. Depending on how much the company brings in, the only savings would be on the "distributions," which are not subject to self-employment tax or other payroll taxes. Distributions are taxed at regular income rates (the traditional income tax brackets). But beware that the IRS scrutinizes S corporations for abuse of this arrangement, so you need to pay yourself a "reasonable salary" before you make distributions. The IRS doesn't have a bright-line definition of a reasonable salary, so you need to be reasonable. :) The other option is to be taxed as a C corporation, which can have tax benefits and negative consequences. C corporations are subject to double taxation, meaning that the corporations net earnings are taxed at corporate income tax rates. Any dividends that you pay yourself are also subject to dividend tax rates on your personal income tax (15%). But -- if you can keep your corporation's net income below $50,000, the corporate tax rate is only 15%, much lower than usual individual income tax rate for many people. But then you still need to pay yourself a salary if you are a corporate officer and want to get paid for the work you are doing, which again triggers w2 payroll taxes. If you want to keep your corporate earnings inside the corporation to build up capital, you can shield those earning from the dividend tax. But, if you begin to accumulate too much, there's a tax for that too. C corporations can be a legitimate way of reducing your tax liability, but you just need to understand the rules. The bottom line is that a single-owner LLC taxed as a disregarded entity is the simplest way of handling things. You'll get a 1099, yes, but that's life. In some states an LLC is expensive to form, in others it's cheap. I personally think that an LLC is nice to have -- it gives you some more credibility than just being an individual contractor. It likely wouldn't provide a ton of liability protection because you are personally doing all of the LLC's work, so a good attorney would make the case that the LLC is really just an alter ego. But then again, that's what insurance is for too. And, if you do decide to form an LLC, just do it in your own state. Forming a Delaware or Nevada LLC is a waste of money and it subjects you to the law of two states (Delaware and your state). Forming the LLC in another state provides no benefit whatsoever for 99% of businesses. |